Strategies for Ensuring Your A&D M&A Deal Successfully Closes
It’s no secret that aerospace and defense have seen significant disruptions in recent years, thanks to political turmoil, shifting administrations, international conflicts, and the ongoing aftershocks of the COVID-19 pandemic. As the industry consolidates, mergers and acquisitions play an increasingly important role in building strong businesses. Disruptions in the M&A process waste time, money, and talent, and may make the next merger even more difficult. A comprehensive A&D investment banking strategy can help reduce the risk of failed deals. Here are the most important strategies to consider.
Because of the potential for national security concerns, antitrust challenges, and international political issues, A&D mergers receive much tighter scrutiny. The Department of Defense recently announced its intent to more closely oversee A&D deals, with an eye toward preventing monopolies and protecting national security. Your deal may be subject to a number of regulatory issues, including:
- Novation: You may need governmental consent to proceed with a deal, especially if one or both parties has a government contract.
- Antitrust concerns: DoD is becoming more aggressive in its goal to prevent monopolies. In many cases, buyers may need Hart-Scott-Rodino Act approval. Failure to seek this approval could subject buyers to tens of thousands in fines each day.
- Export controls: Before putting an A&D business on the market, sellers should do their own due diligence to assess whether export control issues could affect the deal.
- National security: The Committee on Foreign Investment in the United States (CFIUS) reviews foreign investments in mission-critical industries, such as A&D, to assess for national security issues. If such an issue arises, it could slow or kill the deal.
Federal agencies generally have to consider M&A activity when considering bids. It’s common for A&D contractors to change ownership, and doing so is usually not a problem—but only if the M&A activities is disclosed during the bidding process. Government contractors pursuing government bids must disclose ongoing M&A activity. New M&A activity may require specific approval, depending on the terms of the contract.
A Specialized Due Diligence Process
Due diligence is always complicated, but in many industries, it requires only gathering and compiling the right paperwork. A thoughtful approach to A&D M&A requires both sellers and buyers to prepare well ahead of time, with a comprehensive due diligence project. Not only must sellers ensure they can document earnings, projections, and other financial figures. They must also guard against common legal and regulatory pitfalls. Both buyers and sellers must consider:
- Whether the deal is subject to special regulatory measures, such as export controls, and what additional steps must be taking to comply with regulations.
- Whether the DoD is likely to apply closer scrutiny to the deal because of growing antitrust concerns.
- How the deal might affect national security.
- Whether any specific contracts pose significant liability or regulatory issues requiring additional scrutiny.
Ideally, an experienced M&A attorney should evaluate the overall risk of the deal well ahead of serious integration planning. Working with an M&A investment banking advisor is also critical, since their experience in the industry may help with flagging problems early and mitigating risk.